Thursday, January 24, 2008

How Best to Stimulate the Economy

In the face of a looming recession some policymakers, pundits and presidential candidates advocate making the Bush tax cuts permanent. What they fail to explain is how avoiding a massive tax increase on selected Americans in 2011 will help avoid a recession in 2008.

Meanwhile, the press is reporting today that President Bush and Congressional Democrats have reached a deal on tax rebates for households and businesses. What they have failed to explain is how mailing checks in the summer – the IRS is saying that it could not process checks until June at the earliest – will help avoid a recession in the winter and the spring.

Of course if the U.S., like 142 other countries, had a consumption tax the government could simply reduce the tax rate for a period, providing an immediate cost deduction to every household and every business. Unfortunately we don’t yet have such a feature in our tax system.

So, the better way forward at this moment would be to suspend temporarily the collection of both the employer and employee FICA contribution. This would provide an instant 6.5% increase in the purchasing power for every working family. At the same time, this would ease the pressure on businesses big and small. New hiring would also be temporarily less expensive. The Social Security “trust fund” would be temporarily affected, but withholding a few months worth of FICA contributions is a drop in the bucket compared with the much larger issue of long-term adequate Social Security funding.

It is easy to accept that we live in a world of second best choices, but there is no reason to settle for third or fourth best.

Charles Blum


  1. You make some valid points. Through its obstinate refusal to simplify the code in a manner that is consistent with American principals, Congress has effectively removed a tool from its proverbial workbench to deal with the present crisis. Capitol Hill is suffering from a drought of leadership and big ideas to address concrete problems.

  2. Modifying the tax code is a long-term proposition that should focus on strengthening framework conditions. Let's not confuse this with the short-term challenge of dealing with a possible recession.

    Recessions are not bad as such. They are part and parcel of a free-market system. To the extent we find a need to take special action to counter their effects, let’s focus on taking well targeted actions to assist those persons who are most in need – namely those working Americans who lose their jobs.

    From an American in Paris

  3. The problem that I see with a consumption tax is that it will disproprtionately affect the unemployed and underemployed. Millions of Americans pay almost nothing in income taxes but might pay considerably more with a consumption tax on everyday items that constitute the majority of their budget. Nothing brings Americans out of poverty like jobs. The Federal government should better fund food stamps and public works projects to put money directly into the American economy. Rebate checks may be disproportionately spent at U.S. retail locations which simply hock foreign-made goods.